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Making an Impact: Universities and the Regional Economy The Overall Impact of Scottish HEIs on the Economy of Scotland Peter McGregor 4th November 2009 London The presentation draws on joint research with K. Hermannsonn, K. Lisenkova and K. Swales Fraser of Allander Institute and Department of Economics University of Strathclyde http://www.impact-hei.ac.uk Outline of the presentation • Identifying the gaps in our knowledge of the overall impact of HEIs on their own regions • Bridging the gap 1: Demand side – extending HEI-disaggregated input-output (IO) analyses – Building HEI-disaggregated computable general equilibrium (CGE) models and applying them to study the demand side impact • Bridging the gap 2: Supply side – building HEI-disaggregate computable general equilibrium (CGE) models and applying them to study the supply side impact • Future research in the project Bridging the gap 1: Demand side HEI-disaggregated IO analysis • Overall HEI Impacts on Demand: Under alternative assumptions about financing – Aggregate impact of £100 million spent on HEIs (in general): output, GDP, employment • Without offsetting reduction in government expenditure • With offsetting reduction • The “demographic challenge” for HEIs (demand side effects): – Aggregate impact of declining number of students and associated decline in HEI income Demand-side approaches • Have been many studies - the best have used inputoutput (IO) analyses: – – – – Clear methodology, useful description of linkages Build on existing official Scottish IO tables Extremely useful databases created-and results transparent We extend existing literature in to the area of CGE analysis • But, as the best practitioners (many of whom are on our team!) recognise, these studies: – Embody a restrictive view of host region’s economy (excess capacity, significant unemployment) – passive supply side – Focused on the demand-side effects and “one-shot” in nature • The approach cannot capture: – Any of the potential supply-side impacts of HEIs Impacts disaggregated by sector GDP impact £m Total impact Other services HEIs Public sector Business services House letting and real estate services Banking and financial services Transport, post and communications Hotels, catering, pubs, etc. Funding from Scottish Government Distribution and retail Construction Increased exports Manufacturing Primary and utilities -80 -60 -40 -20 0 20 40 60 80 100 120 140 The “demographic challenge” for HEIs • Demographic changes in the UK are projected to result in a fall in the number of students • Recent Universities UK report makes projections of likely numbers of students • We provide a CGE analysis of likely impacts on Scottish economy of Universities UK scenarios • Scenarios based on the reaction of Universities to the demographic changes Scotland demographic challenge Population aged 18-20 Scotland 2006-based principal GAD/ONS projection 210,000 -11.0% 190,000 180,000 170,000 160,000 -16.9% 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 150,000 2005 thousands of persons 200,000 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 150000 2012 2011 2010 2009 2008 2007 2006 2005 thousands of students, FTE Projected total number of students (FTE*): UUK baseline 200000 190000 -6.9% 180000 170000 160000 -11.4% 140000 GDP impact of the loss of income by HEIs 90200 90150 90050 UUK baseline Scenario1 Scenario2 Scenario3 90000 89950 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 89900 2006 £m 90100 Bridging the gap 2:Supply-side HEI-disaggregated CGE analysis • Need to develop databases and evidence on key behavioural relationships: – Input-output and SAM databases with HEI sector separately identified for Scotland (also, Wales, NI, England) – Quantitative representations of the supply-side transmission mechanisms from HEIs to regional economies – Sources: existing literature and new analyses of microeconomic databases • Proceed through development of a suite of regional computable general equilibrium models (CGEs) disaggregated to include HEI sector – Include supply-side – so allow for supply-side heterogeneity among host regions – In principle can accommodate impacts of e.g. technology transfer and any other supply-side impacts – though evidence required to specify and parameterise key relationships The supply side impacts of HEIs • Increased productivity of the labour force – Here focus only on this impact – Underlying assumption is that higher education increases productivity of workers and this is reflected in higher wages (new micro-econometric analysis) • Knowledge spill-over impact – HEIs produce “knowledge” and facilitate its exchange, which benefits wider economy (new micro-econometric analysis) • Wider positive impact of the HEIs – Improvement in health and life style – Decreasing crime rates Measuring productivity • In the absence of direct measures of individual productivity we base our analysis on the assumption that earnings are positively correlated with productivity • We compare earning of graduates vs. non-graduates and calculate the so-called “graduate wage premium” • We assume that it reflects higher productivity of the former group Graduate wage premium • There are a number of estimates of the graduate wage premium for different countries • We are using our own estimates for Scotland based on the LFS for the past three years (20052007) as a baseline – 58% • Sensitivity analysis around this value provides further evidence Productivity vs. sorting •There are two different schools of thought on relationship between education and earnings: – The theory of human capital (Shultz, 1961; Mincer, 1974; Becker, 1975) maintains that education directly augments individual productivity – The theory of sorting/signalling/screening (Spence, 1973; Arrow, 1973; Stiglitz, 1975) advocates that education merely provides a tool to differentiate between more and less productive individuals in the presence of asymmetric information • Strong signalling – education does not effect individual productivity and thus social returns to education are negative • Weak signalling – education has positive impact on productivity but private returns to education exceed social returns • Most studies fail to confirm strong signalling hypothesis • Lange & Topel (forthcoming) estimate that sorting represents only 10% of private returns to education • We also provide sensitivity analysis around this value Share of graduates in total labour force 0.4 0.38 37% Scenario 1 Scenario 2 Scenario 3 0.36 36% 0.34 33% 0.32 0.3 0.28 Scenario 1: All future cohorts will reach the same share of graduates as the highest age-specific share in 2005-07 (37%) 0.26 0.24 0.22 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 0.2 Long run increase in GDP due to changing skill mix of the population in Scotland: Scenario 1 Wage premium Signalling 0% 10% 30% 50% 5.4% 5.0% 3.9% 58% 6.2% 5.5% 4.4% 70% 7.3% 6.7% 5.3% Future research • Explore demand impacts in more detail • Extend the supply-side impact analysis: – composition of graduates by subject and related productivity effects differentiation – use sectoral distribution of graduates to inform distribution of productivity shocks – generate new micro-econometric evidence on knowledge transfer impacts • Application to other countries of the UK • Then extend to close other gaps in our knowledge – interregional impacts – wider effects of HEIs